Oil Storm

With the price of gas back at levels seen five years ago, the world seems in stasis again--except possibly for the sucking economy. However, the pressure of high gas prices has lifted and everyone seems to be breathing a sigh of relief. If only that were the case.

We are cursed with poor long-term memory. Just nine months ago, the US (indeed, the whole world) was in crisis precipitated by rapidly rising oil prices. Granted that much of that price fluctuation was the result of financial speculation. However, the fact remains that 1) oil consumption is growing faster than oil discovery; 2) what oil is newly discovered is more costly to produce than previous fields; and 3) oil is a finite resource--we are going to run out at some point.

I am reminded of a movie that was broadcast on the FX cable channel back in 2005 called "Oil Storm." [Link to a YouTube trailer for the movie: http://tinyurl.com/87jlh8] Before many similar actual events occurred, it depicted the impact of a large hurricane hitting the critical oil region of the Louisiana coast. Except for the riots and general breakdown in civil law, it was a very good prediction of the events that resulted from Katrina.

While the similarities end with Hurricane Katrina, the movie also points to several additional weaknesses in the US dependency on oil:

1. Both China and India are rapidly increasing their consumption of oil. As a result, they are now cash-rich competitors for our oil dollars. This will place additional pressure on oil prices over the long-term. These countries can outbid the US for oil on the open market. Oil prices will go back up.
2. While most of our oil is imported from "friendly" countries such as Canada and Mexico, over time, we will become more dependent on other emerging countries such as Venezuela, Russia, and the "Stans." To say the least, these countries do not particularly love the US. At worst, they can hold the US for oil ransom. This doesn't address the fact that many of these emerging oil nations are unstable and therefore their oil production is questionable at any given time. A perfect case in point is that as this post is written, Russia has cut natural gas supplies to the Ukraine. Since the major pipelines that supply natural gas to Europe pass through the Ukraine, Russia's actions are already causing short natural gas supplies in Germany. The same could happen with oil supplies.
3. While oil speculation has been tamped-down on the US-based commodities markets, there is nothing to prevent the same thing from happening again on other international markets that are closely-coupled to US markets. Therefore, volatility in oil prices should be expected over the next several decades, with the general trend being upward prices.

The problem is, we are in an "oil storm" now. We just don't realize it or we are in denial. While T. Boone Pickens has some personality aspects that I rather detest, he is one of a few that have stood up to state that we should reduce our dependence on foreign oil and has mapped a strategy to achieve that goal. [Link to Pickens Plan here: http://tinyurl.com/94z22d] Former Vice President Al Gore has done the same thing although his approach will be harder to achieve because it is more aggressive. [Link to Al Gore Site: http://tinyurl.com/24w6sq] Of course, Gore is attempting to halt global warming in addition to reducing our dependence on one of the causes, fossil fuels.

All this is nice, but cannot have an impact unless the actions can be converted to legislation. President-elect Obama has demonstrated strong support through the environment and energy leaders he has designated. Whether his agenda can be pushed through Congress remains to be seen. The fact is reducing our dependence on oil will require sacrifices in the short-term. Whether we feel enough pain to do that remains to be seen. One thing is for certain, like the old Fram Oil Filter advertisement, "You can pay me now or you can pay me later," the price will only go up over time. Therefore, it is in our mutual best interest to act now rather than later.

Now is the time to tax oil

I filled up my car this morning and it occurred to me that gas prices are about half what they were in June at the height of the latest gas-price spike. To a large extent, the increased gas prices have contributed heavily to our downward spiralling economy--resulting in increases in everything from gasoline to milk, virtually anything that has oil fuel as a component in manufacture or distribution.

During the summer, with oil prices high, the country (indeed, the whole planet) has had a long overdue discussion on our over-dependence on oil, oil's impact on our environment, the funding of hostilaties against us in oil-producing regions where we are not particularly liked, and the instability it creates in our economy. Unfortunately, a lot of TGIF discussion is beginning to die down now that oil prices are coming back down to levels seen before the latest spike. And that is the problem.

We have short-term memories. Assuming the financial crisis is resolved and credit begins flowing again, people will flock to the sharply reduced over-sized, gas guzzling SUVs--at least they will until the next gas spike. And that's the problem, our short-term memories get in the way of developing good, long-term behavior. There is a solution.

Taxes. I know it is an obscene concept, but taxation can play a very pivotal role in the transition to a non-oil-based economy. The problem is two-fold. First, as long as oil is incrementally cheaper than alternatives, there is little incentive to innovate alternatives. However, the point at which oil costs permanantly exceed alternatives, the impact will be devistating until such time as alternatives and the infrastructure are developed to deliver them. This is where taxation can play a positive and constructive role.

Increasing taxes on oil can level the competitive market allowing alternatives to be developed more rapidly. This would be done by two forces: first, taxes on oil would make oil consumption less attractive, resulting in higher tax revenues per gallon of fuel consumed and providing money that could be used to subsidize fledgling alternative fuel sources until they can gain economies of scale. A second benefit results from reduced consumption which in turn results in reduced demand, which in turn results in reduced oil prices. Keeping taxes on oil at an artifically high level basically means that oil producing nations help subsidize our development of alternatives. As the cost of alternative fuel production falls, subsidies can be lifted and oil taxes can be reduced, allowing natural market forces to take over.

So, we can pay now or we can pay later for the transition from oil. The longer we wait, the higher the cost. Had we heeded President Jimmy Carter's warning, we would not be in this situation.

Your thoughts?

[Posted with iBlogger from my iPhone]

Politics and Our Future

Over the past two weeks, we have seen grand showmanship by two political parties, both extolling change. While I have my personal political view (known to most of my acquaintances and friends), that is not the subject of this post. Rather, this post is on the subject of what has not been addressed by either party (or inadequately addressed) that has the most impact on the future of the U.S., its future economic viability, and its standing among world communities. I believe that the following two issues are of critical importance. I present them with factual realities and the inadequacies of both party's position. In reading further, it will become obvious that the issues being discussed and the solutions being proposed by both parties are found lacking in effecting real change. It is also obvious that what is being discussed by the popular press (from the right, center, or left) fails to address root cause issues or to hold the candidates accountable for inadequate solutions. Once again, the fourth estate has failed us.

• The National Debt: Neither party appears prepared to tackle what could arguably be one of the most critical long-term issues facing the U.S. today. The National Debt (not the deficit, which is something entirely different) today stands at around $9.7 trillion and has been growing at a rate of $.5 trillion per year for the last 7 years. During that time, taxes have been reduced. Barack Obama has proposed a PAYGO system to "pay as you go," and has voted in the past to not raise the ceiling on the National Debt. However, he has not stated how he intends to REDUCE that debt. John McCain has proposed to balance the budget 2013, but has not stated when, how, or what he would do to REDUCE the debt. He also has not made a commitment to stand firm on the debt ceiling. While both candidates play to the immediate gratification of reducing taxes now (whether for the rich or middle class is irrelevant), nobody seems to be holding the candidates accountable for the real issue and how to address it sooner rather than later. In the meantime, nine cents of every dollar now goes to pay interest on the National Debt. With the war in Iraq and Afghanistan continuing to be financed with debt, and with increasing support of failing banks also being financed with debt, it is now obvious that the National Debt will top $10 trillion before whoever the winner is takes office. It should be remembered that debt, and the rate of increase in issuing additional debt instruments (whether printing money or IOUs) directly contributes to inflation (oil is not the only cause).

• Energy Reform: Both candidates have extensive platforms that will reform our energy consumption and sources and they are both to be congratulated--as far as they go. Unfortunately, neither go far enough. First, while government should not be in the role of directing private energy development, they are through continuing subsidies to the major oil companies. At the same time, the Congress has failed to pass energy tax credits for alternative energy (with the exception of ethanol production which amounts to an agricultural subsidy that has already destabilized crop prices and will continue to do so). McCain proposes the development of 45 nuclear generation plants by 2030 which means not one watt of electricity will come on line during his administration or his successor's administration. At the same time, his platform is to "Drill baby, drill," as the chant from the Republican National Convention so eloquently phrased it. Yet, if an oil company elected to begin drilling, it would take years to gain approval, more years to equip and drill, and even more years to bring successful wells (not all are) to production. Estimates range from many years to decades. Again, additional oil production from this approach will not be seen in any volume during a McCain administration. Since Obama has also supported this approach (although limited), the same holds true for his administration. Simply put, the most rapid solution would be to decrease subsidies to the oil companies and shift those subsidies to alternative energy solutions--and not just to ethanol production. While it would have a short-term increase cost to energy, it would have a long-term stabilizing effect (and possibly lead to a reduction). Yet neither candidate is willing to make this commitment.

What do you think are the real issues impacting our future? I'd like to know.

Sources:

"The Debt to the Penny and Who Holds It," TreasuryDirect, http://www.treasurydirect.gov/NP/BPDLogin?application=np

"Issues," McCain-Palin Campaign, http://www.johnmccain.com/Informing/Issues/

"Issues," Obama-Biden Campaign, http://www.barackobama.com/issues/

"Obama, McCain on the Issues," by Calvin Woodward, Associated Press, September 8, 2008, http://hosted.ap.org/dynamic/stories/W/WHERE_THEY_STAND?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2008-09-08-16-58-15

"Why Lifting the Offshore Oil Ban Won't Help Gas Prices," by Kathy Gill, Kathy's US Politics Blogg, http://uspolitics.about.com/b/2008/07/17/why-lifting-the-offshore-oil-ban-wont-help-gas-prices.htm

Peak Oil versus Peak Demand

I was listening to the Diane Rehm Show (NPR) this morning and there was a discussion about whether the energy industry has reached "peak oil,"--the point at which oil production peaks, subsequently leveling off, and then declining. While I did not have the time to listen to the whole discussion, the debate seemed to revolve around when oil production would peak. The years mentioned ranged from 2012 to 2030. However, I would propose that the argument is misguided. Debating when peak oil production will occur is a little like being in a leaky boat and debating when the volume of water coming into the boat will peak. It becomes irrelevant when one considers that the boat is adding people into the boat faster than water is being bailed from the boat; at some point the boat is going to sink, regardless of whether the boat has reached peak water intake. If people are coming on board faster than water is being bailed, the boat is going to sink. Indeed, if the water leak is fixed and people keep coming on board, the boat is going to sink.

In the same way, whether the oil industry has reached peak oil production is irrelevant: The "peak" point that is important to understand is when demand exceeds production. Once that point is reached (for world oil production, it has already been reached), what is important to understand is the "oil gap."

The oil gap is the difference between oil production and oil demand. As the gap increases, oil prices increase (price is determined by supply and demand). At some point, the price reaches a point were substitute energy sources become price competitive. This is the environment we are in today.

Therefore, the question becomes not when oil production peaks, nor when oil demand exceeds oil production. Rather the important question is when demand drives oil prices to the "tipping point" where alternative energy sources become cost competitive. At that point, those organizations developing alternative energy sources, particularly renewable or sustainable energy sources, become competitively advantaged in the market. Therefore, the debate should not be when oil production will peak, but when alternative sources become advantaged. At that point, those organizations that have been investing in alternative energy sources will be the hot stocks for the near-term future. The next Googles are out there ready to take off.